Enforceability of pay-if-paid clauses under Nevada law. APCO Construction, Inc. v. Zitting Brothers Construction, Inc. Supreme Court of Nevada (2020). by Hugh Anderson

Summary: APCO Construction was the general contractor on a Las Vegas construction project that ground to a halt in late 2008. APCO subcontracted wood-framing, sheathing, and shimming work to Zitting Construction. The subcontract stated that payment to Zitting was conditioned on APCO’s receipt of payment from the project owner, Gemstone—as the Nevada Supreme Court described it, this was “known colloquially as a pay-if-paid clause.”

Various lawsuits and mechanics liens followed in the aftermath of the project’s failure. Zitting’s lawsuit claimed it was owed $750,000 for work completed, including retainage and change order work. APCO had never received payment from the owner, and defended against the Zitting claim based on the subcontract’s pay-if-paid clause.

The trial court granted partial summary judgment in Zitting’s favor, ruling that the pay-if-paid provisions were void and unenforceable under Nevada law.

On appeal, the Nevada Supreme Court came to the same ultimate conclusion as the lower court, but emphasized that pay-if-paid clauses are not per se unenforceable in Nevada; rather, the courts must consider whether the subcontract payment provision in question complies with or violates the specific terms of a Nevada statute establishing payment rights of subcontractors. Enforceability is strictly a function of the statute, not of broader principles, and a statute-based case-by-case analysis is needed:

The District Court therefore erred in outright concluding that pay-if-paid provisions are void and unenforceable without considering the specific contract terms and whether the provisions were permitted under statute.

The controlling statute, NRS 624.628(3), lists certain subcontract provisions that are against public policy and void—for example, requiring a lower-tiered subcontractor to waive listed rights. The statute contains cross-refences to various other statutory provisions, such as a statute that creates a right to prompt payment.

After conducting an analysis of the Zitting subcontract with respect to the governing statute (and its cross-referenced subsidiary statutes), the Nevada Supreme Court concluded that the pay-if-paid provision was unenforceable, under a specified statute, because the clause limited Zitting’s right to prompt payment.

Comment: The Zitting decision provides the Nevada courts with clear guidance on the process to use when analyzing the enforceability of a pay-if-paid clause, and rightly emphasizes the importance of the statutes concerning payment and liens. However, in reviewing these statutes it is difficult to think of a true “pay-if-paid” clause that would not be contrary to Nevada law. The Zitting court expressed its desire to “resolve any confusion that parties may still have regarding the enforceability” of pay-if-paid clauses in Nevada, and certainly there will be no question moving forward that it is essential to follow the process of drilling down to the specific statutory line items. Nonetheless it would have been helpful to see an example of an enforceable pay-if-paid provision.

The slight disconnect here may simply be a matter of semantics and categorization. Perhaps the “pay-if-paid” clauses that are enforceable under Nevada law would be labeled “pay-when-paid” clauses in other contexts.

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